WEAKNESSES

RISK ASSESSMENT

Brief slowdown and confirmation of the recovery in internal demand

Growth is expected to slow in 2016, approaching its potential (between 1% and 1.5%). The explanation for this lies in the expected decline in public construction because of the transition between two European funding programmes. The decline in the construction of dwellings should come to an end, coinciding with the end of the fall in prices. The moderate upwards trend in company investments will be confirmed as confidence returns and the debt reduction decelerates. This will also apply for household consumption (53% of GDP), which will benefit from the expansion of employment and the relaxing of wages policy, and for public consumption (19%) with the ending of the freeze on public sector wages and pensions. The contribution from foreign trade will remain largely positive. Exports (82% of GDP) will benefit from the recovery, even slight, in the European economy (75% of exports of goods), in particular in Italy, Austria and Croatia. The country has a long-standing industrial tradition, with strong points such as automobiles, pharmaceuticals, white goods and electrical equipment, whereas the contraction in real wages has boosted their competitiveness. Tourist revenues will increase as foreign visitor numbers rise.

Continuation of fiscal consolidation

The country’s budgetary situation deteriorated sharply in 2013, when the State was obliged to rescue the banking system at an estimated cost of 11% of GDP. However, by organising the rescue of their banks and by adopting an austerity plan, the Slovenian government avoided the direct intervention of the European Commission and the IMF.

Following the changes in revenues and expenditure, the completion of the bank rescue, the return to growth and the reduction in the cost of debt (30 year bonds issued in September 2015 at a rate of 3.1%), the budget situation is improving with a total deficit that should fall below 3% in 2016. A budget law voted in June 2015 requires the elimination of the structural deficit (i.e. excluding cyclical effects), currently running at 2.7%, by 2020, save in exceptional circumstances. The primary balance (i.e. excluding interests) should even allow for an initial reduction of debt percentage as of 2016. Its increase in 2015 can be explained by beneficial prefinancing of an instalment falling due in 2016. Additionally, in order to reduce the role of the State in the economy - 18% of commercial assets are held by the former - to release resources and rationalise the management of publicly owned companies, parliament has approved the privatisation of fifteen companies.

A solid current account surplus

The comfortable current account surplus comes from the positive balance (10% of GDP) in the trade in goods and, even more so, from tourist and transport services that largely surpass the revenue deficit (2%) associated with the repatriation of dividends and the payment of interest on the external debt. The latter amounted to 121% of GDP at the end of September 2015. Having skyrocketed as a result of the bank rescue, the public share accounts by itself for 68% of GDP. However, after deducting the assets held abroad, it only represents 32% of GDP. Foreign investments, which have been declining since 2009, are recovering (3% of GDP in 2014), but only account for 13% of the investment stock.

Economic challenges for the centre left government

The elections in July 2014 introduced a new character to power, the university law professor and constitutionalist, Miro Cerar, and his Modern Centre Party, only just created and including academics and company executives. This victory was an expression of the voters’ frustration with ongoing corruption scandals and the traditional parties, as well as their impatience to find a way out of the crisis. Having won only 36 out of the 90 seats, Miro Cerar formed an alliance with the Democratic Party of Pensioners of Slovenia (16 seats) and the Social Democrats (21 seats). The path will be narrow. He has promised to rationalise the public sector, reassuring both the European Commission and the markets. But, he also has to take the population's attachment to social achievements into account. Because of reticence among sections of the political class and investors, only five of the 15 companies on the list have been privatised. The sale of Telekom Slovenije was cancelled and, whilst the third largest bank was sold to US investors in June 2015, the privatisations of the largest (Ljubljanska Banka) and second largest (Abanka) are not going happen until 2017 and 2019. Despite the transfer of three billion euros of non-performing assets (mainly minority holdings in large companies) to a government owned company (BAMC) for restructuring, they still account for 11% of the banks’ portfolios. On top of this, the profitability of the banking sector remains poor because of low interest rates, credit to the private sector that should just stabilise in 2016, and an as yet incomplete provisioning. The prospects for debt collection are clouded by the fact that one third of the companies in the country, covering half of its assets, are over-indebted and that State owned companies are subject to frequent political intervention. Some companies could struggle as a result of any closing of the borders linked to the refugee crisis.